New York's top financial regulator is drafting new regulations designed to crack down on private-equity firms that own insurance companies, a move that threatens firms such as Apollo Global Management LLC with restrictions that could curb earnings.
Benjamin Lawsky, Department of Financial Services superintendent, said Tuesday that he was "very concerned" about the increasing role of private equity-controlled insurers. Over the past year, private equity firms have roughly quadrupled their share of the indexed annuity market to about 30 percent and the fixed annuity market to about 15 percent, according to figures from his office.
Annuities are financial products that guarantee regular payments over a specified period of time. As the number of older Americans reaching retirement increases, annuities may gain in popularity as retired workers look to supplement their income with either fixed-rate products that deliver a steady amount of cash, or variable-rate annuities that fluctuate with the market.
The risk that a private-equity funded insurance company that has sold annuities may not be able to stand behind its commitments has state regulators worried, and Lawsky said his office is working on new rules designed to limit that risk.
"I'm not saying that a private equity company can never buy an insurance company, but we need to make sure we've thought through what that future looks like and what regulatory safeguards and guardrails we should put in place," Lawsky said in a speech in Albany, New York.
The Department of Financial Services is examining potential rules that could be modeled after regulations governing banking ownership, according to a person familiar with the matter. Banking rules typically require much more disclosure than current insurance regulations. The state regulator is also weighing whether to require the parent company of private-equity funds to guarantee the commitments of its insurance holdings, the source said.
Previously, Lawsky noted that private-equity firms rarely purchase banks because the "regulatory requirements associated with such acquisitions are more stringent than a private equity firm may like."
"These regulatory requirements in the banking industry are designed -- in part -- to encourage a long-term outlook, and ensure that the person controlling the company has real skin in the game," Lawsky said of banking rules.
Last month, Lawsky said he was scrutinizing what he called the “troubling role” of private-equity firms that were purchasing insurance companies.
In December, Apollo announced that its Athene unit would purchase Aviva Plc's U.S. annuity and life insurance businesses for $1.8 billion. The sale has not been finalized and awaits regulatory approvals.
During Apollo's quarterly earnings conference call with analysts and investors on Monday, Marc Spilker, the firm's president, dismissed analyst concerns over increased regulatory scrutiny of its insurance business.
"Athene is not an investment within a private equity fund," Spilker said. "And so, Athene has been primarily funded by a permanent capital vehicle. Athene is very well capitalized and it's very well positioned to take advantage of growth. It's led by a very, very experienced management team who is focused on creating safe, consistent long-term returns."
Lawsky said his office was concerned about firms such as Apollo because private-equity firms typically are focused on the short term, while the annuity business is "all about the long haul."
The risk is that "their focus is on maximizing their immediate financial returns, rather than ensuring that promised retirement benefits are there at the end of the day for policyholders," Lawsky said of private-equity firms entering the insurance market. "And -- because of their potential short-term focus -- there is a risk that these companies may not be delivering the level of compliance and customer service that we’d expect of them given the importance of this product to so many seniors on fixed incomes."
Private-equity firms that typically make high-risk, high-leverage investments aren't "necessarily a natural fit for the insurance business, where a failure can put policyholders at sigifnicant risk," Lawsky said. Insurance companies generally make conservative investments, he added.
With benchmark interest rates near record lows as the Federal Reserve attempts to stimulate borrowing and economic growth, companies and investors are having more difficulty finding relatively safe investments that generate attractive returns.
Lawsky said he's "very nervous" that as the so-called baby boomers near retirement the popularity of annuities will increase. Private-equity firms could be driven to generate higher returns on the pool of cash they collect from purchases of annuities by making aggressive investments.